Macroeconomic update: Recession is now the baseline scenario

• Virus spread in Europe triggers recession fears
• Lower oil is good but it can cause short term troubles
• China attempts to return to work

Throughout 2019 we repeatedly warned that the state of the global economy was weaker than generally seen by the markets and that a combination of trade truce and global monetary easing could only produce a temporary recovery. Unfortunately, this is not what has happened. Today we take a macroeconomic look at the latest developments without a typical regional division.

Bond markets see a recession

We’ve already seen some February data from China and at least the PMIs are at the deep-recession level. The hope was that while the economy pretty much stalled, it would recover, helped by external demand and some stimulus. The problem is that if other economies had to implement similar countermeasures against the virus, a cascade effect could be observed. With a rapid spread of virus in Europe and some acceleration in the US, the concern is that this will be exactly the case.

US bond yields seem to suggest a recession in the global economy and the global composite PMI could fall below 40. Source: Bloomberg

The bond market already prices in the US recession. Is it right to do so? It seems like at least a technical recession is in play. The question is if there is a wave of defaults that could make it much more severe.

Lower oil is good but…

Oil price tumbled sharply as the Saudis started a price war with Russia and that could generally be a much needed stimulus for the World. The economies affected by coronavirus are those that stand to benefit from the cheaper energy. Having said that there could be a problem with the US energy companies. If they default on their bonds, market gyrations can hit growth globally in a similar fashion to 2008. This just stresses how important it will be to avoid a global wave of defaults in coming months.

Lower oil price should help those economies that need this help the most – unless there is a wave of defaults. Source: XTB Research

China’s returning to work – but slowly

There’s been mixed signals from China. On one hand the data for February has been dramatic. On the other, the government tries to convince us that the economy will be running at a normal rate by April. So far, only 60% migrant workers have returned but there are some promising signs. Outside of Wuhan, we can see that peak hours traffic has nearly returned to normal in most of the cities. That suggests that people are back to work. Good news. The bad news is that intra-day and weekend traffic remains depressed and this will be reflected in lower consumer demand. Even worse news is obviously global developments that will further affect supply chains and hit demand for the Chinese exports.

Peak traffic in Shenzen was higher today than in 2019 – this is good news. Source: TomTom